THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

SUZANNE MALVEAUX, CNN ANCHOR: You're in THE SITUATION ROOM.

Happening now: disaster upon disaster in the Gulf of Mexico, as a burning oil rig sinks, raising fears of an environmental nightmare.

Also, growing concern over nuclear smuggling after seizure of enriched uranium. Now it has two countries in a war of words.

And a top-secret Pentagon spacecraft, it's scheduled to lift off tonight. But what is this mysterious machine?

Wolf Blitzer's off today. I'm Suzanne Malveaux.

Welcome to our viewers in the United States and around the world. You're in THE SITUATION ROOM.

On this Earth Day, there is growing fear of an environmental disaster and a human tragedy. An oil rig that exploded and caught fire Tuesday night sank today about 50 miles off the Louisiana coast. Among the latest developments, the Coast Guard says more than a million gallons of oil and diesel could spill into the Gulf of Mexico.

Now dozens of specialized boats and aircraft are racing to the scene right now with skimmers, booms and other equipment to minimize the impact. At the same time, the search continues for 11 people missing since the blast.

Officials warn their chances of survival decrease with each passing hour, and they say it is too soon to predict how bad the environmental damage is going to be.

David Rainey is with Transocean. That is the company that owns that rig.

(BEGIN VIDEO CLIP)

DAVID RAINEY, VICE PRESIDENT, BP: At this point, I think there are just too many uncertainties for us to be able to estimate what the volume of the potential spill could be. That's something that we're working on very hard. And we will keep you informed as our evaluation progresses.

QUESTION: Would you call it a major spill or...

RAINEY: I think it certainly has the potential to be a major spill. (END VIDEO CLIP)

MALVEAUX: Our CNN's David Mattingly, he just spoke with someone who has been on the scene.

David, tell us, what are you picking up here? What is happening?

DAVID MATTINGLY, CNN CORRESPONDENT: Well, Suzanne, Captain Michael Roberts was piloting his supply boat in the Gulf of Mexico and responded to the initial distress call.

When he got there, he got extremely close, was going to assist in the rescue efforts, but he wasn't needed for that, so he joined the firefighting efforts, putting water on that fire for hours and hours after his arrival, well into the next day.

And he shot some incredible video that we have to show you very close up, and he has his own in his own words telling us about his experience.

(BEGIN VIDEO CLIP)

MATTINGLY: How close did you get?

CAPT. MICHAEL ROBERTS, SHOT VIDEO OF OIL RIG FIRE IN GULF: We were holding off about 25, 30 feet. And sometimes the rig was actually swaying. So, I mean, the primary principle is it should stay still.

MATTINGLY: And what were you doing that close?

(CROSSTALK)

ROBERTS: Trying to get as much water on it as I could, trying to help at any means necessary, I mean, that we could do without damaging the vessel and putting our crew members at risk.

MATTINGLY: Tell me about the heat. How bad was it when you got up close? What did it feel like?

ROBERTS: Man, it was -- I have never been close to the sun, but I imagine that's about what it felt like.

MATTINGLY: Once you saw the damage that had been done to this rig and the huge fire that was going on there, what went through your mind?

ROBERTS: Prayer, just prayer for anybody who was on there. That's it. I knew it was bad. You want everybody to make it home. Just prayer.

(END VIDEO CLIP)

MATTINGLY: Very hard for him to talk about, very emotional when he was talking about the 11 missing crew members from that rig. You heard him talking about the heat, Suzanne. What he experienced there, he said that it was -- he could only step outside onto the deck for about a minute at a time, because the heat was so intense.

He said other boats actually had to peel away and move back when their exterior equipment started to melt.

MALVEAUX: Thank you, David. I can only imagine what that was like for those people there on the rig. Thank you very much.

Joining us on the phone now with more is senior chief petty officer Mike O'Berry. He is with the U.S. Coast Guard.

Thank you, sir, for joining us.

If you can tell us, what is the latest with the rescue effort there? Do we know anything more about the possibility of finding those 11 missing?

MIKE O'BERRY, U.S. COAST GUARD: Thanks for having me on.

And, yes, Coast Guard does continue to search at this time for those 11. And, as you heard from Captain Roberts, all that -- the effort -- and Coast Guard would like to applaud the efforts of those guys that were out there during that initial explosion.

We have been searching obviously since about 10:00 Tuesday. But there's 115 people that have made it home to their families because of the efforts of Captain Roberts and men like him.

Coast Guard still -- there's still some probability that those 11 may be alive, so the Coast Guard continues to search for those 11. We do know Transocean has talked with the families and has expressed that there may be a chance they might have been close to the initial blast, but as long as there's some probability that they're alive, the Coast Guard will search.

MALVEAUX: And how are they searching for them? What do they believe? Are they in some sort of vehicle or boat that they managed to escape in? What do they believe are the conditions of those people out there?

O'BERRY: At this time, we're not sure if they were in a life raft or if they were actually in the water. There's lots of variables that go into a search and what could have happened.

We don't want to speculate on where they may be, so we have helicopters, we have search airplanes and two cutters that are searching a wide area for potential survivors.

MALVEAUX: And what is the next step, now that this whole thing is underwater?

O'BERRY: The Coast Guard will work closely with BP. BP is the responsible party, so they are bringing in all the assets we need to mitigate the pollution response.

Coast Guard has hundreds of people coming in to help oversee that effort. BP's brought in multiple boats, upwards of 32 different skimming boats. By the end of today, we're expecting to have a million feet of boom in the area so that we could help boom off that pollution.

MALVEAUX: All right. Officer O'Berry, thank you so much for joining us.

This accident comes just weeks after President Obama opened more areas to offshore drilling. Right now, new drilling is mostly confined to the green area on the map in the Gulf of Mexico. Now, look at what's highlighted in yellow.

The president's plan allows new drilling off Virginia and considers for much of the Atlantic Coast as well. It would expand drilling in the Gulf of Mexico and exploration in Alaska's Cook Inlet. But it puts new protections on Alaska's Bristol Bay.

Now, that is seen in red, and it leaves in place a ban on drilling off the West Coast.

An investigation is under way into a case raising new concerns about nuclear materials falling into terrorist hands. It also is raising some tension between two bitter rivals.

Our CNN's Brian Todd has the details.

(BEGIN VIDEOTAPE)

BRIAN TODD, CNN CORRESPONDENT: Suzanne, the president of Georgia says his security forces have intercepted a shipment of highly enriched uranium that was headed for the black market.

President Mikhail Saakashvili told the Associated Press the seizure occurred last month as it came into his country from the Caucasus region. He says a group of foreign nationals have been detained. Now, the Georgian government has thwarted a few smuggling operations in the recent years.

And Saakashvili says most of the smuggling has come -- quote -- "from the direction of Russia." He blames Russia for creating instability in that region that leads to smuggling. Now, an official at the Russian Embassy in Washington told us that he denies that.

He says it's the Georgian side that's creating the instability.

Joining us now is Joe Cirincione, an expert on nuclear weapons at a group called the Ploughshares Fund.

Joe, thank you very much for joining us.

JOSEPH CIRINCIONE, PRESIDENT, PLOUGHSHARES FUND: My pleasure.

TODD: We're going to first talk about this region that we're talking about, the Caucasus region in Southern Europe around Russia and Georgia. This is an area called Abkhazia, which is kind of a breakaway region from Georgia. South Ossetia is right here. North Ossetia is kind of around here. These are areas that are especially vulnerable to trafficking, are they not?

CIRINCIONE: Exactly. Most the border entry points from Russia to Georgia come through these two areas and there's very weak border controls in South Ossetia because Russia claims it as part of its territory.

Ossetia, neither Georgia nor Russia at this point are guarding that border tightly at all.

TODD: Three facilities in particular in Russia right now, Novouralsk, Seversk, Zheleznogorsk, these are places where highly enriched uranium, weapons-grade uranium has been stored. And these have security issues, right?

CIRINCIONE: That's right. They all have enriched uranium. They have received security upgrades, but none have completed those security upgrades.

TODD: And there's another facility called Novosibirsk, which is about right here on the map, a place where they make fuel, nuclear fuel fabrication. It's a nuclear fuel fabrication facility.

And some material from there was smuggled all the way down here into Georgia in an infamous case in 2006, right? That was pretty chilling.

CIRINCIONE: Right. In 2006, four people were seized selling almost a kilogram's worth of highly enriched uranium, weapons-grade, really high-quality stuff, as a sample, saying there was plenty more to come from.

They traced it back to Novosibirsk, which is the fuel -- which makes highly enriched uranium into fuel for some research reactors. The fear is that there's a supply that has been stolen from this facility that still hasn't been detected.

TODD: The people he was selling it to were posing as terrorists and he was all too willing to sell it to them, right?

CIRINCIONE: This was a sting operation done by the Georgian authorities. They said they were a radical Islamic group and he was perfectly willing to sell it to them.

In fact, in this incident, like all the others, the only way we found out that some of this highly enriched uranium was missing from the facilities is when it showed up in an arrest. The facilities themselves never knew it was gone.

TODD: OK. We're going to bring in some pictures here. This is highly enriched uranium in small pouches and what's interesting is, again, this comes in -- you know this can come in very small amounts, and kind of hard to detect, right? CIRINCIONE: Right. This is like a black powder. It's like black talcum powder and it's not highly radioactive, so the plastic itself is enough of a shield to prevent the carrier from any radiation damage. A thin lead shielding, like you see here, will prevent it from being picked up by any scanners.

TODD: Why should an American care about some of these smuggling operations that are taking place so far from the United States?

CIRINCIONE: Because this is happening very close to where al Qaeda operates. Al Qaeda could get this material and, as we know, they have no trouble hitting us.

TODD: All right, Joe, thank you very much for joining us. We appreciate it.

Now, we ran some of this by the official we spoke with at the Russian Embassy, and he said security at all Russian facilities that store uranium is adequate. He's denying that they have any major security issues, Suzanne, but this is something that certainly bears watching.

(END VIDEOTAPE)

MALVEAUX: Thank you.

Jack Cafferty is next with "The Cafferty File."

Also, Senate Democrats hammer their Republican counterparts over financial reform. But can there be real bipartisanship behind the apparent gridlock?

Plus, it was the scene of a notorious attack. Now Americans visiting a U.S. ally are warned they could be terror targets again.

(COMMERCIAL BREAK)

MALVEAUX: Jack Cafferty's here with "The Cafferty File."

Hey, Jack, what are you working on?

JACK CAFFERTY, CNN ANCHOR: Suzanne, in calling on Wall Street to back reform, President Obama says he believes in the power of the free market, but he also says that a free market was never meant to be a free license to take whatever you can get however you can get it. That's a quote.

The president says that reform of the financial industry is necessary in order to avoid another crisis, the aftermath of which we are still living through. He says reform would help keep consumers from being duped by deceptive financial deals, make complex investment derivatives more transparent, and create a dedicated agency to make sure banks don't take advantage of people.

The translation of that last part is another federal bureaucracy. The president's in a tough spot. He's trying to convince those on Wall Street to support reforms of Wall Street. And he insists the reforms are in the best interests of both the country and the industry. We will see.

The fact of the matter is, these calls for more regulation follow government meddling in everything from health care to the auto industry to the banks. Not what usually comes to mind when you think about free market capitalism, and not everybody is comfortable with this. A new Pew poll suggests an overwhelming majority of Americans are either frustrated or angry with the federal government, and almost a third of us see the government as a threat to our personal freedom.

The poll also shows that most Americans are against a larger, more activist government, except -- and this is important -- except when it comes to regulating the big financial companies.

So, here's the question: How much should the government be involved in things like Wall Street, health care, the auto industry, banks, whatever? Go to CNN.com/caffertyfile, and let us know your thoughts -- Suzanne.

MALVEAUX: All right, thank you, Jack.

President Obama pressed his case for financial industry reform just blocks from the lion's den with a speech at the Cooper Union near Wall Street. He said that currently, the flawed regulations leave the country vulnerable to another financial crisis. And he also said that Republicans critic who say the proposed bill would lead to more bailouts, well, that that argument is not even factually accurate.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: A vote for reform is a vote to put a stop to taxpayer-funded bailouts. That's the truth, end of story. And nobody should be fooled in this debate.

(CHEERING AND APPLAUSE)

(END VIDEO CLIP)

MALVEAUX: I want to bring in our CNN senior congressional correspondent, Dana Bash, who is here.

And, Dana, I notice, the president, he was rather subtle in his criticism against the Republicans, but, you know, the Democrats, not so much.

DANA BASH, CNN SENIOR CONGRESSIONAL CORRESPONDENT: About as subtle as a freight train. I -- it was like nothing I have ever seen before...

MALVEAUX: Really?

BASH: ... the Senate Democrats' press conference, but what they did is, they held a press conference. And I think we have some video I can show you. They brought with them and played controversial clips of the Republican Senate leader, Mitch McConnell, saying things like the Democrats' bill to clean up Wall Street would lead to a permanent bailout for taxpayers.

And then Democrats played it and then they would try to poke holes in Mitch McConnell's argument. Now, Democratic sources I talked to, Suzanne, they say that this is a tactic that they are employing, what they -- they call it define or be defined. It's something that they admit that they actually really botched during the health care debate. Take a listen.

(BEGIN VIDEO CLIP)

SEN. CHARLES SCHUMER (D), NEW YORK: Bottom line, on the health care bill, we allowed too many lies to get out there without rebuttal, because we thought they were so obviously untrue.

But we have learned our lesson. And the minute these things come out of the mouths of some of our Republican colleagues, we rebut them, and we rebut them again and again.

(END VIDEO CLIP)

BASH: Listening to that, Suzanne, it might sound like this whole debate over financial reform, the Senate is just stuck in partisan gridlock. But it's not. That's really just a tactic.

Behind the scenes, what's going on is, there are genuine bipartisan discussions going on, and both sides I talked to today say that they actually think that they are getting much closer to a deal. It's just a tactic.

MALVEAUX: I want our viewers to take a listen to what Mitch McConnell said earlier today when he was responding to the Democrats.

(BEGIN VIDEO CLIP)

SEN. MITCH MCCONNELL (R-KY), MINORITY LEADER: I don't think bipartisanship is a waste of time. I don't think a bill with the legitimacy of a bipartisan agreement is a waste of time. Is it a waste of time to ensure that taxpayers never again bail out Wall Street firms?

(END VIDEO CLIP)

BASH: (AUDIO GAP) soft that tone is from the Republican leader?

MALVEAUX: Yes.

BASH: The tone of the Republicans as the week has gone on, on this issue has gotten softer and softer. And you talk to Republicans and they say a couple reasons. One is, they actually think that it's just going to happen, that they believe that this financial reform bill is going to go through, and one way or another.

MALVEAUX: Sure.

BASH: And also they think it's good politics for them to be on the side of hitting Wall Street and having more transparency for Wall Street.

And for the Democrats it's just the opposite, again, another lesson they learned from how they think that they really messed up a lot of the politics of the health care debate last year. The Democratic leader talked about the fact that during health care they allowed bipartisan talks to go on for months and months and months.

And today in response to a question I asked him, he said I'm not going to waste any more time of the American people. So, he actually is going to hold a vote to press forward on Monday on financial reform, with or without a deal, but it is possible.

MALVEAUX: All right.

BASH: We have seen this movie before, but it is possible they could get something before that.

MALVEAUX: All right, thank you so much, Dana. Appreciate it.

Well, investors were largely unmoved by the president's speech. In the 27 minutes he was on stage, the Dow ticked up, but only 28 points. It ended the day up just nine points, closing at 11134, despite two encouraging new reports.

Now, the Labor Department announced that jobless claims fell for the first time in three weeks, down 24,000 to 456,000. And a real estate industry group reports that existing home sales jumped 6.8 percent in March, as buyers are moving to take advantage of a tax credit that now expires this month.

For more on our top story, the sunken oil rig off the coast of Louisiana, just how much oil is spilling into the Gulf? And can it be stopped?

Plus, countdown to the launch of a top secret Pentagon project. It's scheduled to lift off shortly, but what is it?

(COMMERCIAL BREAK)

MALVEAUX: The Coast Guard says there's already a 1-by-five-mile oil slick that is spreading from this site.

For more on the potential environmental impact, we are joined by Tim Darley, commander. He's a former Coast Guard commander, and now a consultant whose clients include Transocean. That's the rig's owner.

Thank you very much, Commander, for joining us.

I want to start off by asking, the rig's owner here, they were not able to stop the flow of oil before this rig sank, so I'm assuming that you have oil gushing out now into the water. Is that correct? And is there any way of stopping that?

CMDR. TIM DARLEY (RET.), U.S. COAST GUARD: Well, that's a good possibility, Suzanne. Thank you very much for having me tonight, by the way. And, first, I would like to say our condolences and heartfelt prayers and thoughts go out to Transocean. Many friends there, and I have got a great relationship with them, and I just want to let them know that we're thinking about them tonight and the loss -- or the possible loss of 11 people.

But, as far as that's concerned, the OIM, the offshore installation manager, and his command team would have done the best they could to stem that flow before he left. He has a set of procedures to go through, but there comes a time he has to make a decision. And the decision is, do I stay on board and continue to fight this and mitigate it, or do I take the crew that I have, the remaining people on board, and take the boats and go to safety?

MALVEAUX: Do we know if he stopped the oil before that rig started sinking?

DARLEY: No, ma'am, I don't. I don't have details on that, I'm sorry. That would be Transocean or possibly the Coast Guard might know. But, no, ma'am, I don't have that.

MALVEAUX: We know that the Coast Guard says that they are using these vessels, submersible vessels. What are they looking for under water at this point?

DARLEY: Well, they're probably looking at the well itself, if they can go -- if they have the capability to go that far right now. They may be looking at -- well, now that the rig has sunk, they may be looking around the rig. We have got to find out what position she's in, the drill string itself, which attaches to the rig, and to see if the oil is actually gushing out.

But it's approaching nightfall right now, and the good news is, that is good, calm weather out there for the Coast Guard, for Transocean, and for the standby vessels to work on, so that's good news on that.

MALVEAUX: Now, these rigs are supposed to be unsinkable. What do we think might have happened in this scenario, in this case?

DARLEY: Yes, ma'am. And I tell you, that's a fallacy, Suzanne, and it's a shame. But there's no such thing as an unsinkable ship. And we could go back to the Titanic or Ocean Ranger or Piper Alpha and discuss that.

The most important things about these rigs is the command ability on board and can people prevent them from capsizing and turning over. We do the best job we can. The Transocean has some of the best training in the world, some of the most qualified people out there. And I'm proud to be in association with them.

But I assure you they did the best job they could before they left.

MALVEAUX: All right, Commander Darley, and we appreciate your time. And we certainly hope that those 11 missing are found safely. Thank you.

DARLEY: Thank you, Suzanne.

President Obama goes to New York to lay out his argument for reforming Wall Street. Well, was he able to sway any Republicans to his side? I'm going to ask former New York Mayor and Republican presidential candidate Rudy Giuliani.

And first lady Michelle Obama took some questions from some kids at the White House today, but the Q&A session was interrupted by a very special guest.

You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

MALVEAUX: They opposed President Obama on the stimulus package, on health care reform, and so far (AUDIO GAP) reform. But will Republicans eventually jump on board? And what are the consequences if they don't?

Joining us to talk about that and much, much more is former New York City Mayor and former GOP presidential candidate Rudy Giuliani.

Thank you so much, Mr. Giuliani, for joining us here.

RUDOLPH GIULIANI (R), FORMER NEW YORK CITY MAYOR: Thank you, Suzanne.

MALVEAUX: I want to start off -- we listened to the president today. He was on Wall Street, and he was defending his economic policy, and, as we had mentioned, GOP did not get on board when it came to the economic stimulus package, health care reform. They could be left behind when it comes to financial reform, and the president says, look, things are looking better. Take a listen to what he said.

(BEGIN VIDEO CLIP)

OBAMA: One year ago, the economy was shrinking rapidly. Today, the economy is growing. In fact, we've seen the fastest turnaround in growth in nearly three decades.

(END VIDEO CLIP)

MALVEAUX: Is it time for Republicans, your fellow Republicans, to give this president his just due?

GIULIANI: Well, they have, I think. I think Republicans have agreed on things that made sense, where they could agree. It's the president and Nancy Pelosi and Harry Reid who have shut the Republicans out. And then the reality is the two things you've been mentioned is stimulus program, Republicans couldn't possibly agree to that. It was massive spending on behalf of mostly democratic causes. To me, as a person involved in politics, it was a political payoff to the democratic constituencies. The only jobs really helped, government jobs, not private jobs. Even on CNN, you counted jobs. I watch that very carefully. That were preserved, which is a strange way to kind of analyze this, it's usually jobs created. The jobs preserved are mostly government jobs. There's a reason for that, government unions supported the Obama administration. The money was flowing back through the stimulus program, so Republicans couldn't have possibly supported that.

MALVEAUX: So, what about financial reform here? Are you guys missing the boat here?

GIULIANI: Financial reform would be terrific if it was really financial reform. They're doing nothing, as far as I'm concerned, to really deal with the core problem here. The core problem here was inadequacy of capital in the banks. Now, the government was just as responsible to this as a private sector. For the president, he should go to Wall Street and lecture Wall Street on what went wrong. The president should have gone there with a big mea culpa as to what the government did wrong as well.

You forget the subprime. You forget Fannie and Freddie. You forget all the entreaties by members of Congress in the House, to let out subprime mortgages, let out subprime mortgages, there couldn't have been any of these derivatives. In fact, it didn't happen in the first place.

MALVEAUX: The president acknowledged that Washington needed to be reformed, but --.

GIULIANI: But he hasn't.

MALVEAUX: But he did today. He did today.

GIULIANI: He isn't reforming Washington.

MALVEAUX: And Senator Chuck Grassley, a fellow Republican, he also --

GIULIANI: Right.

MALVEAUX: He acknowledged that he thought when it comes to trading derivatives and the idea of making them more transparent that the president had a good idea, and here's what he said, Mr. Giuliani. He said, I vote for the chairman derivatives bill today, because I think transparency is the right policy. The draft isn't perfect. I want to fix the way a provision is written so that whistle-blower protections are not weakened as a result, for example, but the Lincoln Bill is an important step in the right direction for transparency and accountability in the derivatives market. Does he not have a point here? I mean --

GIULIANI: Sure.

MALVEAUX: OK, so --

GIULIANI: He has a point there. Derivatives should be more transparent. The capital requirements should be increased. The government should not take a bigger role in bailing out companies, even if they say they're not, they are. They're creating a whole agency, a whole new government agency. The way to look at this is, the bad part of this is, this is another step in the Obama administration having the federal government taking over vast larger portions of our economy. They took over car companies. They took over financial institutions. They took over banks. They took over health care, and now, they are trying to get themselves involved in some of the (inaudible) --

MALVEAUX: Do you have a better idea? Do you have a better idea?

GIULIANI: Yes, the better idea here is, what went wrong here is the government was involved too much. Government should stay out of telling private institutions to operate, giving out subprime mortgages. They should put some restrictions on themselves. Go straighten out Barney Franks role with Fannie and Freddie as you are straightening out Wall Street. We should have much tighter capital requirements. Lehman Brothers never should have gone under. Lehman Brothers should have had sufficient capital.

That was not regulated properly. That should be straightened out. These will be the substantive things to do, but this, Suzanne, is a political assault. You really think the suit against Goldman Sachs wasn't timed to fit all this? You'd have to be on Mars to think that. And the White House and everybody else was ready to send out all kinds of communiques as soon as that happened.

MALVEAUX: But let's talk about the perception here because, you know, there are a lot of people who are looking at this and saying the Republicans jumped in too late when it came to health care reform. They were basically out of the debate here, and you have the walls -- in "The Washington Post" today, the editorial that makes the point, the Democrats clearly see financial reform as a winner either way.

With Republican cooperation, they have a bill, with a Republican obstruction, they have an election issue. For once, Democrats are negotiating from strength. Is there a concern here that Republicans, your party, is going to appear as if you're the guys for Wall Street and not for the little ones who the Obama administration says they're sticking up for?

GIULIANI: Suzanne, I think the appearance may be as you say, it may not be. Let me tell you what the reality is, the reality is that the lawsuit against Goldman Sachs was brought, I believe, in order to affect this. You shouldn't be using the SEC that way, a 3-2 vote. The whole issue there is whether people knew that Paulson was on the other side. We now find out there's testimony that they were told, so you wonder what's the lawsuit all about? So, I think President Obama has a problem. I think President Obama's problem is --

MALVEAUX: OK.

GIULIANI: He is inserting in the minds of Americans and becoming more and more solid that this president is on an inexorable mission to take over more and more parts of the private sector. MALVEAUX: I got to leave it there.

GIULIANI: Even parts that are justified. He just really got to watch out just how far is going because it's getting pretty extreme now.

MALVEAUX: All right. Mr. Giuliani, we're going to leave that for another day --

GIULIANI: Thank you.

MALVEAUX: And another debate. Thank you very much for your time.

GIULIANI: Thanks, Suzanne. Nice to be with you.

MALVEAUX: Appreciate it.

Reverend Franklin Graham disinvited now to a national day of prayer event at the Pentagon. We have details about why the military has now changed its mind.

(COMMERCIAL BREAK)

MALVEAUX: Lisa Sylvester is monitoring some of the other top stories around the world right now. Lisa, I know you have a developing story. what do you have?

LISA SYLVESTER, CNN CORRESPONDENT: Hi there, Suzanne.

Well, we just learned that the U.S. army has withdrawn its invitation to the Reverend Franklin Graham to speak at the pentagon on the national day of prayer next month. Concerns had been raised about comments Graham made about Muslims that many found offensive. Army officials fear if Graham spoke at the Pentagon, it might feel tensions in the Islamic world. Graham is the son of the famous TV minister, the Reverend Bill Graham -- Suzanne.

MALVEAUX: All right. Thank you, Lisa. Florida Governor Charlie Crist took another hit today in his state GOP Senate primary campaign. Former vice president Dick Cheney became the latest high-profile Republican to endorse Crist's rival. That's right, Marco Rubio. And Cheney called on Crist to drop out rather than run as an independent.

Well, here to talk about that, our CNN's John King, host of "John King, USA," which starts at the top of the hour. And john, this is like -- this is such a hot race already. It is unbelievable development.

JOHN KING, CNN ANCHOR: It is, probably, the most fascinating congressional Senate race in the country this year. In part, because Charlie Crist started as a Republican darling. He was on John McCain's short list. He was a big player in the 2008 presidential campaign. He was popular. Now, he's pariah in his own Republican party, the former House speaker, Marco Rubio, getting a parade of conservative endorsement, Dick Cheney as you know is the last one on it.

What was interesting about it is Dick Cheney didn't just say, I'm endorsing Marco Rubio because I think he's a better conservative. I think he's a better Republican. He said, you can't trust Charlie Crist. You can' trust him to go to Washington and fight the Obama agenda. And as you noted, there are many people in Florida, close friends of Charlie Crist included, who think early next week he will announce he is running as an independent. He's dropping out of the Republican primary. Now, the governor has not said that. He's only said he's thinking about need. So, we need to let this play out, and we don't know that these people who think this are correct, but it's fascinating.

MALVEAUX: If he does that, what is the likelihood that he'll be successful if he runs as an independent?

KING: That could hardest question is can you raise the money? And one of the things the Republican party of Florida did today and the CNN obtain this memo is send around a medal saying, look, you have a loyalty oath if you're a member of the republican party of Florida, you can't endorse him. You have to withdraw your endorsement. You can't give him money. You should ask for your contributions back.

And so, can Charlie Crist raise enough money as an independent? There's a recent poll out that shows him actually winning in a three- way race now, but it's a big state. It takes a lot of money to be on television. His campaign staff would disappear. I'm told his polling company who is now working for him as Republican would quit and not work for him as an independent. So, we'll watch this one play out. It's great.

MALVEAUX: Incredible story. And we'll be watching you, John, in just a couple of minutes.

KING: Thank you.

MALVEAUX: All right. Thank you.

Top secret military machine. The air force is getting ready to launch it into space. We're going to have details.

(COMMERCIAL BREAK)

MALVEAUX: Any minute now, the U.S. military is due to launch a secret project. Our CNN Pentagon correspondent, Barbara Starr, she's joining us with these details. Barbara, what do we know about this?

BARBARA STARR, CNN PENTAGON CORRESPONDENT: Suzanne, later tonight from Cape Canaveral, Florida, there will be the first launch into space of a very peculiar, very secret air force project.

(BEGIN VIDEOTAPE)

STARR (voice-over): It's a military mystery. What is this? Is it an aircraft? Is it the next-generation space shuttle? And why is it such a secret? This is the X-37B, a classified air force project that's never been fully explained by the Pentagon, but it hasn't stopped the speculation. Some worry, this is the beginning of military operations in space. That the plane might someday carry weapons to shoot down enemy satellites.

VICTORIA SAMSON, SECURE WORLD FOUNDATION: They're also concerned it may be used as a quick response sort of vehicle, where it could be used to be launched very quickly, be sent over the planet to dangerous spot very quickly and then release weapons at that point.

STARR: In a recent meeting with reporters, a top air force official said no way.

VOICE OF GARY PAYTON, AIR FORCE DEPUTY UNDER SECRETARY FOR SPACE PROGRAMS: I don't know how this could be called weaponization of space. Fundamentally, it's an updated version of space shuttle kind of activities in space.

UNIDENTIFIED MALE: Lift off.

STARR: Unlike the reusable space shuttle, the X-37B is unmanned, but it's much smaller and it's controlled from ground stations. It can stay in space for 270 days, but the air force won't say how long it's staying up this time or what exactly it will be doing, other than testing out its high-tech systems. The air force won't even say how many billions of dollars it's spending on the program.

SAMSON: We don't know why it's so classified. You can't find how much it is in the budget.

(END VIDEOTAPE)

STARR (on-camera): Well, the air force has been interested for years in some kind of space vehicle, smaller than the shuttle, but something that they could send up into space, bring back to earth, and use over and over again. They just don't want to say what they're going to use it for -- Suzanne.

MALVEAUX: All right. Thank you, Barbara.

The state department is warning of the possibility of new terror attacks in India. And it says that Americans could be the targets. The U.S. embassy in New Delhi is urging Americans to be vigilant, particularly in places where westerners congregate. Now, our CNN national security contributor, Fran Townsend, is here to talk about this. Fran, tell us why, you know, how serious is this warning now? And why are Americans being targeted in India?

FRANCES FRAGOS TOWNSEND, FORMER BUSH HOMELAND SEC.: You know, it's interesting, Suzanne, I think Americans don't really realize the number of people that have been killed inside Indian terrorist attacks over the last two or three years. It numbers not in a hundreds but over a thousand people have been killed mostly in large public spaces, think of markets, think of trains. In fact, India was the first place we saw things what we call a bicycle bomb. Imagine, a little backpack placed on the back of a bicycle. It's parked in a market. There are hundreds of them when people go to the markets and it explodes after the individual had abandoned the bicycle.

These things happen actually more often than we really hear in the western media, and unfortunately, Americans who are visiting India will go to these markets. They're beautiful. They're very colorful, filled with spices and original crafts there, and so, Americans get killed. I think the U.S. embassy is reaching out and warning American tourists in India to be very careful when you're in this very crowded markets.

MALVEAUX: Why is this happening now? We know that we have a very good relationship, the U.S. government, with India. We know President Obama met with the leader of India at the nuclear summit here in Washington just a couple weeks ago. Who is responsible for this? Who is targeting Americans in India?

TOWNSEND: It's interesting. It's not just Americans. I mean, obviously, India has lost a great many of its own citizens. This is really the Sunni extremist, the Muslim extremists who are doing these attacks. Remember in the Mumbai attack, there was great tension that rose between India and Pakistan because it was Islamic extremists coming out of Pakistan who had planned that attack and were responsible. And so, these Islamic extremists throughout the region support the efforts inside India to launch these attacks.

India has tried very hard to build their organic capability like the United States. They're a very decentralized government, and so what happens is it's hard to make large acquisitions for maritime and surveillance activity. India is reported to be looking at a National Counterterrorism Center, very similar modeled on the United States sort of model, to be able to have that integration capability that they don't have themselves.

MALVEAUX: Now, you had mentioned the Mumbai attacks two years ago. Do you think that the government is doing a good job in India to make sure that these kinds of terrorists attacks don't happen again?

TOWNSEND: Well, they've made tremendous investments, but as I said, you know, what they're trying to do is raise their own capability of their police and intelligence services, the sharing of information. You know, Suzanne, we've seen here just how hard that is. India is a much larger place, far more diverse in terms of geography and capability and so bringing basic standards and information sharing has been a challenge for them. I think they've put a lot of money into it and a lot of time and effort, but they have yet to get results.

MALVEAUX: OK. Thank you so much, Fran. Appreciate it.

Jack Cafferty is next with your e-mail.

And the first lady's news conference goes, well, to the dogs. Yes, well, one dog in particular.

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MALVEAUX: Time now to check back in with Jack Cafferty. Hey, Jack.

JACK CAFFERTY, CNN CORRESPONDENT: Suzanne, the question this hour, how much should government be involved in things like Wall Street, health care, the automobile industry, and the banks?

David in Virginia writes, corporations have always been trying to pick our pockets, but now it's gone to a whole new level. Wall Street uses high-speed computers to jump ahead of people like us in order to make their profits. Banks use data mining to decide if you're getting into financial trouble. Insurance companies use algorithms to decide when to rescind your health coverage. Even Alan Greenspan admitted he was wrong, thinking Wall Street and the banks were responsible enough to police themselves. If Washington doesn't do it, then we'll be right back here in a few years.

Paul writes from Ontario, those little regulation of banks in the U.S. and last year, 140 of them failed. There is regulation of banks in Canada and none has failed. Seems obvious which works better.

Chad in L.A. writes, I would argue the government has been very conservative with its involvement, just reactionary at best. Government seems only to get involved after the industry has already screwed over the public in some way. From denying medical care to so many to diminishing 401 ks, foreclosures on so many homes, our government's only increased involvement after these industries have taken so much from the average citizen.

Tim in New York writes, what this administration wants to do is pretty mild. They're just putting guidelines back in after they've been taken down by the previous administration. A free market economy is good provided. It doesn't extend into the criminal practices that we have been subjected to.

and Ken says, governments should not be involved in big business. The people running these companies are among the most honest you'll find, especially in the health care and banking industries and also on Wall Street. These people will always think first about the people whose money has been entrusted to them.

Do you want to read more on this, go to my blog, CNN.com/Caffertyfile. Suzanne, see you tomorrow.

MALVEAUX: All right. Thank you, Jack. I'll see you tomorrow.

First lady, Michelle Obama, is upstaged during a Q&A session with kids. Jeanne Moos with who stole the spotlight?

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MALVEAUX: It's most unusual to be able to steal the spotlight from first lady Michelle Obama, but that is just what happened today. Jeanne moos tells us about it.

(BEGIN VIDEOTAPE)

JEANNE MOOS, CNN NATIONAL CORRESPONDENT (voice-over): He was first introduced as --

UNIDENTIFIED FEMALE: A special guest.

MOOS: And then upgraded to --

UNIDENTIFIED FEMALE: Very special guest.

MOOS: By the time he arrived, he got the rock star treatment.

MICHELLE OBAMA, FIRST LADY OF THE UNITED STATES: Want to say hi?

MOOS: It was almost as if the first dog thought he was taking questions.

OBAMA: Do I like living in the White House? And yes, it's fun living in the White House [barking].

You can't live life without vegetables, right? You got to have vegetables. All right. Let's get another question. Let's get another question, Bo.

MOOS: No wonder he thinks it's his press event. This is a dog who's on a first named basis with celebs so famous they go by their first name, too. But when Bo --

UNIDENTIFIED FEMALE: Um --

MOOS: Couldn't keep his paws off the first lady, when he couldn't keep his trap shut --

OBAMA: What a clown. [ barking ] Shhh. quiet. They never been anybody in my race who has been -- [ barking ] Why now? All right. You're going to have to go.

MOOS: Oh, no, Bo's in the dog house, but his expulsion led the kids the near mutiny.

OBAMA: Are you ready to go?

MOOS: Even when he was handed off and escorted out, many of the questions were still about him.

UNIDENTIFIED KID: What's Bo's favorite toy?

MOOS: A big rope.

UNIDENTIFIED KID: Do you spend more time with your dog or with your kids?

MOOS: The quiet was broken at the Bring your Kids to Work event, but the kids actually chanting for Bo's return. Bo was allowed back. Before the kids left, he worked the room. His fans swarmed around him, grabbed at him, occasionally blocked by the first lady herself. Bo mania breaks out when you bring your dog or bring your kids to work.

Jeanne Moos, CNN, New York.

(END VIDEOTAPE)

MALVEAUX: Remember, you can follow what's going on in the SITUATION ROOM. Catch up with everything on my twitter page, twitter.com/SuzanneMalveaux. That is all one word. I'm Suzanne Malveaux in the Situation Room. "John King USA" starts right now.